Global Equities - Taking stock after the shock

After a period of exceptionally low volatility, performance trends have shifted sig-nificantly over the last few weeks, raising broader macro concerns and producing one of the biggest trend reversals in recent years.

The correction in equity markets over the last couple of weeks is not particularly unusual, although events feel more dramatic given the prior period of low volatility. Equity corrections can start for a variety of reasons, but they rarely end until a ‘growth scare’ comes with some degree of investor capitulation (not seen yet).

Our economists do not expect the current growth scare to be followed by a recession, the most likely catalyst for turning a tactical correction in stocks into a longer-term decline. However, while the longer-term outlook for equities appears benign, we expect the current period of elevated uncertainty and volatility to persist for a while longer and see a better entry point later this summer.

While the S&P 500 is down 8% from its high on 16 July, our performance and valuation framework suggests that risk-reward remains skewed to the downside. We would feel more comfortable adding exposure when the index is back close to its 12-month average level (4900) and valuation is closer to its 10-year average of 17.9x based on forward 12-month earnings rather than the 19.4x level we see today.

Post a 23% fall from its peak, the risk-reward profile for Japanese equities has improved significantly, with valuations falling to their lowest post-covid level at Monday’s close (with the index’s forward 12-month price-earnings ratio at 11.8x).